We are not going to return to those commonplaces that we all know about 401(k) retirement plans, a type of plans that are becoming very popular recently. You know, you have to maximize your contributions as much as possible, seek to capture the employer’s counterpart, and start as soon as possible, leaving the money intact for as many years as possible. We already know all that.
But what are the real secrets to make your retirement reserve grow like foam, and you can retire with a good amount of dollars? Well, there are some secrets that were collected from experts who have managed to amass more than a million dollars for their golden years.
Learn to Improve Your Retirement Funds: Secrets From Experts
Each person has a unique financial situation, which means that it is not possible to address all possible complications here. However, I can provide some reasonable estimates based on average national data. As you explore further, you’ll find that you have some wiggle room on each metric, and it’s critical to spend time using tools like CalcXML’s 401(k) calculator.
Before moving forward, we are obliged to emphasize that these types of tools are merely informative and, for no reason, replace the advice of an expert in retirement savings. Its accuracy depends on the assumptions that are entered and the available data, so it should not be considered as a replacement for the guidance of a financial adviser or a tax expert.
Having said all this, let’s move on. When using this tool, you will need to provide key information such as:
- The time you have left until retirement.
- The current balance in your 401(k) account.
- The amount you’re currently contributing to your 401(k) as a percentage of your salary.
- Your employer’s contribution to your 401(k).
- The returns you expect to make on your 401(k) investments before and after retirement.
- The estimated duration of your financial needs during retirement.
Reaching the $1M Retirement Goal
Let’s see an example with concrete numbers: Imagine Jenny, a 35-year-old professional who is planning her retirement. She earns $60,000 a year and expects annual salary increases of 2%. Jenny is starting from scratch in her 401(k) account and has decided to contribute 8% of her annual salary to the plan, with her employer contributing another 4%.
These numbers represent a typical situation in national terms and are quite conservative. Following a “moderate” scenario with annual investment returns of 8%, Jenny can expect to reach a total value of $1.1 million in 30 years. This is slightly above his goal of having a million dollars for his retirement.
In the example of Jenny, our young and forward-thinking thrifty worker, about $4,800 would be contributed to the savings in the first year, let’s say it’s 2024, and the amount will gradually rise to $6,470 in 2054. With an employer making matching contributions, these would start at $2,400 and could go up to $3,325, in the same time period.
The contributions could add up to almost $300,000 in that timeframe. In other words, more than two-thirds of your savings will be the result of investment returns.
This would be a “moderate” scenario, that is, conservative, because well, that’s the attitude of people who invest money, especially in retirement savings: you have to be conservative and avoid excessive and unnecessary enthusiasm. According to a publication of The Daily Fool, the S&P 500 market index (SNPINDEX: ^GSPC) has returned a CAGR (Compound Annual Growth Rate) of 8.4% in the last 30 years, including the various crises that global markets have had in those years. And if an individual had the foresight to reinvest dividends along the way, he would get an annual return of 10.5%.
How to Diversify Your 401(k) and Reduce Risks
Many 401(k) plans provide investors with the opportunity to select a broad diversification of investments to minimize risks and maximize long-term return potential.
These plans offer a variety of investment options, ranging from stocks and bonds to mutual funds and ETFs. This allows investors to build a diversified portfolio that covers different asset classes and sectors of the economy.
Diversification is a fundamental strategy to reduce risk by spreading investments across different types of assets. When one sector or asset class goes through difficulties, others can compensate for those losses, helping to smooth out volatility and protect invested capital.
In addition, some 401(k) plans offer automatic diversification options, such as target-date funds, which automatically adjust the asset allocation based on the investor’s age and investment time horizon.
Your wealth growth can be accelerated if your 401(k) plan allows you to choose individual stocks and you find some that are real winners. For example, if you work for companies like Apple (NASDAQ: AAPL) or Microsoft (NASDAQ: MSFT), which offer solid 401(k) options with exceptional long-term stock market returns, your wealth can grow significantly.
However, it is important to remember that it is not necessary to win the stock selection lottery to become a millionaire in 30 years. There are safer and more consistent strategies that can provide solid results over time.
For example, ETFs (exchange-traded funds) are an effective way to match long-term market returns. These funds, such as the Vanguard S&P 500 ETF (NYSEMKT: VOO) that tracks a solid index with low fees, offer a near-perfect combination for competitive returns with minimal management costs.
There are also other options, such as the Dow Jones Industrial Average ETF Trust (NYSEMKT: DIA) to track leading U.S. stocks or the Invesco QQQ Trust (NASDAQ: QQQ) for those more ambitious investors who want to follow the NASDAQ composite index.
Since you got so far in our article, remember that this is just information and you better ask for the advice of a financial expert, before moving your money from one place to another: you’re the one with the final decision.